Iron-ore ships are poised to earn more than operating costs for the first time this year as rates rally on speculation Chinese steel mills will accelerate imports because of a 1 trillion-yuan ($158 billion) building program.
Capesizes, each carrying 160,000 metric tons of ore, will earn $12,500 a day in the fourth quarter, according to the median of eight analyst estimates compiled by Bloomberg, compared with $4,459 on average since the end of June as assessed by the Baltic Exchange. Investors may profit by buying forward freight agreements, traded by brokers and used to bet on future costs, which anticipate $8,385. Ship owners need $7,437 to pay overheads including crew and repairs, a London-based unit of Moore Stephens LLP advising the industry estimates.
China, accounting for 65 percent of seaborne demand, bought the most ore in three months in August and stockpiles at ports fell for the first time since March, government and Shanghai Steelhome Information data show. Ore prices that neared a three- year low on Sept. 5 have since rallied 21 percent as the state announced spending on everything from subways to roads to warehouses. Increasing demand for the commodity, the second- biggest cargo after oil, will help diminish a glut in shipping.
"The 1 trillion-yuan package should provide a lifeline to struggling Capesize owners," said Frode Moerkedal, an analyst at RS Platou Markets AS in Oslo whose recommendations on the shares of shipping companies returned 21 percent in the past two years. "Capesizes should benefit from the investment, as they're the main vessel class to ship iron ore."
Rates tumbled as much as 89 percent to $2,644 this year as fleet expansion outpaced growth in demand, according to the London-based exchange, whose data are used as benchmarks for about 75 percent of commodity cargoes. While Capesizes rallied 43 percent to $3,779 since Aug. 21, this quarter's average would be the lowest for data going back to 1999. Earnings may rise as high as $25,000 in the next several months, said Omar Nokta, an analyst at Dahlman Rose & Co. in New York.
Ore at the Chinese port of Tianjin, a global benchmark, last traded at $105.10 a so-called dry ton, down from as much as $149.40 in April, according to The Steel Index Ltd., a unit of McGraw-Hill Cos. Prices, which retreated as China's economy slowed for six consecutive quarters, rebounded after the government announced building plans on Sept. 5 and 6 that Nomura Holdings Inc. (8604) estimates are worth $158 billion.
Investors can profit from the rally in rates by buying shares of shipping companies with a higher proportion of their fleets operating in the spot market rather than on long-term charters, Nokta said. That includes Eagle Bulk Shipping Inc., Genco Shipping & Trading Ltd. and Baltic Trading Ltd. (BALT), all based in New York, he wrote in a Sept. 10 report.
Seaborne iron-ore exports will expand 14 percent next year, the most since at least 2005 and three times faster than in 2012, Morgan Stanley estimates. The Capesize fleet's 8.6 percent expansion will be the smallest since 2009 and compares with 12 percent this year, according to the bank.
While the projected fourth-quarter Capesize rate would cover owners' operating expenses, it wouldn't be enough to also meet the cost of their debt. Once interest and loan repayments are included, the break-even level rises to $15,000 a day on average, according to Platou. Earnings last exceeded that in the final three months of 2011.
The combined market value of the 14-member Bloomberg Pure Play Dry Bulk Shipping Index has fallen to $5.92 billion from $36.2 billion in May 2008, data compiled by Bloomberg show. D/S Norden A/S, located in Hellerup, Denmark, Seoul-based STX Pan Ocean Co. and Antwerp, Belgium-based Cie. Maritime Belge SA are the largest members of the gauge.
Capacity gluts exist across most of the merchant shipping fleet. Rates for the largest oil tankers slumped 62 percent this year, according to Clarkson Research Services Ltd., a unit of the world's largest shipbroker. An index reflecting charges for six types of containers fell 29 percent in the past year, a gauge from the Hamburg Shipbrokers' Association shows. Moore Stephens estimates operating costs every September and its 2012 review has yet to be published. Daily expenses for Capesizes rose 1.7 percent to $7,437, it said in a report a year ago.
The rally in Capesizes and iron-ore prices may not last because growth is slowing around the world. The International Monetary Fund cut its 2013 global forecast to 3.9 percent from 4.1 percent in July. The 17-nation euro area contracted in the second quarter and won't expand again for another year, based on the median of 22 economist estimates compiled by Bloomberg. China's economy will expand 7.9 percent in 2012, the least since 1999, according to 34 economist estimates compiled by Bloomberg.
"It's clearly slowing down fast," Jim Chanos, the founder and president of hedge fund Kynikos Associates Ltd., said in an interview on Sept. 11 at Bloomberg's headquarters in New York. "Will there be rallies in iron ore and other industrial commodities, from time to time? Of course. But I think structurally, until China really addresses this credit-driven infrastructure and fixed-asset investment model, the surprises are going to be on the downside."
Shares of Baltic Trading, which operates nine bulk- commodity carriers, fell 29 percent to $3.39 in New York trading this year. The stock will rally to $5.38 in the next 12 months, according to the average of four analyst estimates compiled by Bloomberg. Genco declined 44 percent since the start of January and Eagle Bulk retreated 12 percent.
Producing a ton of crude steel in a blast furnace requires about 1,400 kilograms (3,086 pounds) of iron ore, 770 kilos of coal and 270 kilos of limestone and scrap steel, according to the World Steel Association. Global crude-steel output rose 0.8 percent to 895.4 million tons in the first seven months from a year earlier, the Brussels-based WSA estimates. Production will reach an all-time high of 1.56 billion tons in 2012 and 1.62 billion in 2013, according to MEPS (International) Ltd., a Sheffield, England-based industry consultant.
Increasing iron-ore shipments mean the Capesize fleet will work at about 80 percent of capacity in the next 12 months, from 77 percent, Platou estimates.
China imported 62.45 million tons of ore in August, 7.9 percent more than the previous month, customs data show.
Inventories held at ports retreated 1.2 percent to 98.5 million tons, according to Shanghai Steelhome Information, a research company based in the city. The nation has imported more in the second half of every year relative to the first six months in all but one of the past 20 years, based on data compiled by Bloomberg.
"There should be more iron-ore and coal imports into China to satisfy the increased steel demand resulting from the new infrastructure projects," said Doug Mavrinac, a Houston-based analyst at Jefferies & Co. "The dry-bulk shipping market could finally make the cyclical turn toward sustainable profitability for 2013 and beyond."
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